MEXICO Law and Practice Contributed by: Ángel Escalante, Gabriel Rojas, Daniel Colunga and Brenda Favela, Escalante & Asociados
home in Mexico; or (ii) their centre of vital interests is located in Mexico. The concept of centre of vital interests is determined through objective economic criteria. An individual is deemed to have their centre of vital interests in Mexico when: (i) more than 50% of their total income during the calendar year is derived from Mexican sources; or (ii) their principal professional activities are carried out in Mexico. In practice, Mexican law relies primarily on these eco - nomic indicators, rather than on broader personal or family ties. In addition, Mexican nationals are generally presumed to remain tax resident in Mexico, unless they formally notify the tax authorities of a change of tax residence. Accordingly, the loss of Mexican tax residence requires not only a change in factual circumstances but also compliance with formal administrative requirements, including the filing of a notice before the tax authority. 2.3 Taxation of Resident Individuals As mentioned above, individuals who are tax resident are subject to income tax on their worldwide income, which is calculated by applying a progressive rate schedule established in Article 152 of the MITL, under which the applicable tax rate increases according to the level of income earned. The taxable base is determined by subtracting allow - able deductions from gross taxable income. These deductions may include certain personal expenses, contributions, and other deductions expressly author - ised under domestic tax law, such as medical expens - es, transportation expenses, and similar items. In the international context, the principal mechanism used to avoid double taxation is the foreign tax credit, which allows taxpayers to credit foreign taxes paid against domestic income tax liabilities, within the lim - its established by Mexican legislation. 2.4 Taxation of Non-Resident Individuals Non-residents deriving income from Mexican sources are subject to income tax in accordance with Title V of the MITL provisions. In general terms, such income is
taxed through withholding at source, applying specific rates depending on the income, including: (i) employ - ment income; (ii) interest; (iii) dividends; (iv) royalties; and (v) capital gains. The applicable withholding rates will depend on the type of income and the specific conditions established under domestic law. However, when an applicable double taxation treaty exists, the taxpayer may benefit from reduced withholding rates or alternative alloca - tion of taxing rights provided under the treaty. 2.5 Tax Residence of Legal Entities Pursuant to Article 9 of the FFC, a legal entity is con - sidered tax resident when its principal place of busi - ness administration or place of effective management is located within Mexican territory. This criterion is complemented by Article 4-A of the MITL, which provides that foreign transparent legal entities may also be treated as Mexican tax residents when their place of effective management is located in Mexico. This criterion aims to identify the jurisdiction where key strategic and managerial decisions are effectively made, reflecting the approach generally adopted in international tax law for determining the residence of legal entities. 2.6 Definition of Permanent Establishment Under Article 2 of the MITL, a permanent establish - ment is defined as any place of business through which business activities are wholly or partially carried out, or through which independent personal services are rendered. Examples of PEs include branches, agencies, offices, factories, workshops, installations, mines, quarries and any place where natural resources are explored, extracted or exploited. The MITL also recognises the existence of a depend - ent agent PE in cases where a person in Mexico habit - ually acts on behalf of a foreign resident and performs activities leading to the conclusion of agreements that: • are concluded in the name of the foreign resident;
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